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Many companies look to business-process outsourcing to save money. But the most successful clients concentrate less on cost savings and more on achieving innovation.

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In high-performing business-process outsourcing relationships, companies and service providers work together to foster innovation.

In recent years, the number of companies that outsource critical business processes to outside suppliers has grown significantly worldwide. The business-process outsourcing (BPO) market has been estimated to be worth $309 billion in 2012,1 including activities such as finance and accounting, human resource management, procurement and legal services, and the overall volume is estimated to be growing at a rate of around 25% annually.2 Many organizations initiated BPO as part of an operational effort (for example, to reduce costs or access skills), but it has evolved into much more. Senior managers today expect more from BPO service providers than short-term cost savings and meeting minimum contractual requirements.3 Moreover, they are skeptical of big-bang improvements.4 Companies want service providers to innovate constantly. (See “About the Research.”) In relationships that companies classify as high performing, the service providers perform a series of innovation projects that deliver substantial long-term improvements to the client’s operating efficiency, business-process effectiveness and strategic performance. Consider the following examples:

A BPO provider helped a health care company improve the claims adjudication process by using analytics to predict claims likely to result in rework. The predictive tool now intercepts more than 50% of claims that would have been reworked, saving the client $25 to $50 in administrative costs per overpaid claim and $6 to $12 per underpaid claim.

An aerospace manufacturer worked with its BPO provider to add new key performance indicators and processes to manage third-party vendors. This allowed the client to improve customer-order fill rates for new parts from 60% to 85% and turnaround times for delivering parts to grounded vehicles from 21 hours to 17 hours.

A supermarket chain collaborated successfully with its BPO provider to implement new forecasting tools, techniques and methods that improved the client’s stock fill rate from 80% to 95%, reduced inventory by 27% and reduced error rates by 50%.

About the Research

We have been studying business-process outsourcing relationships since 2003. Our previous work identified the most effective types of contractual and relational governance and provider capabilities needed to transform a client’s business processes. Our newest BPO research includes a survey and interviews.

9. Researchers have found that people innovate more when incentives are based on recognition and status rather than monetary rewards. See J. Birkinshaw, C. Bouquet and J.-L. Barsoux, “The 5 Myths of Innovation,” MIT Sloan Management Review 52, no. 2 (winter 2011): 43-50.

10. For more ideas on how senior managers can build “innovation funnels” to find the best innovation ideas from employees regardless of where they are based, see M. Reitzig, “Is Your Company Choosing the Best Innovation Ideas?” MIT Sloan Management Review 52, no. 4 (summer 2011): 47-52.

11. Francis Bidault and Alessio Castello found that both very low levels and very high levels of trust are detrimental to innovation. They found that the optimal level of trust is somewhere in between. See F. Bidault and A. Castello, “Why Too Much Trust Is Death to Innovation,” MIT Sloan Management Review 51, no. 4 (summer 2010): 33-38.

About the Authors

Mary C. Lacity is Curators’ Professor of Information Systems at the College of Business Administration, University of Missouri-St. Louis. Leslie P. Willcocks is a professor of work, technology and globalization at the London School of Economics and Political Science.

5 Comments On: Outsourcing Business Processes for Innovation

Joe Tillman | April 24, 2013

Great article speaking to the benefits of Vested (aka Vested Outsourcing)! I’m glad to see more articles being written on Vested, such as this one. The Microsoft Accenture OneFinance deal was recently featured as a case study in the book Vested: How P&G, McDonald’s, and Microsoft Are Redefining Winning In Business Relationships.

The University of Tennessee has been researching the exact same topic since 2003 as well and has numerous case studies supporting all types of buyer – supplier (service provider/vendor) relationships (BPO, Supply Chain, Facilities Mgmt, Charities, Gov’t Contracting, etc.) to drive innovation. For more information, check out http://www.vestedway.com.

Joe

Jennifer Bach | April 30, 2013

Excellent article. Outsourcing partnerships that focus solely on cost savings will not produce innovations and are also not likely to last. Innovation cannot occur unless you have the right team and can build towards a healthy relationship with your BPO service partner.

In our recent white paper, we partnered with Everest Group and discovered the “8 Habits of Highly Ineffective Outsourcing Relationships” (http://www.telusinternational.com/strategic_outsourcing). The research recognizes that innovation occurs by creating a shared culture that builds the partnership. Establishing trust allows for operational improvements that go beyond the bottom line.

We have found that relationships that foster innovation are the result of shared vision, collaborative communication, mutual trust and a commitment towards resolutions.

Jennifer Bach, TELUS International

Alleli Aspili | May 27, 2013

Innovation has been taking over every industry today and it’s becoming more visible in the outsourcing industry. Outsourcing Insider also published an article about this recently – Paradigm Shift: Not Just Providers, but Partners in Innovation (http://www.blog.infinit-o.com/paradigm-shift-providers-partners-innovation/) – and I think it does explain some of the points you have touched here. Well, that being said, I’m still looking forward on how innovation will take over outsourcing these days.

Cha Wi | March 10, 2014

It’s really important focusing on innovation instead of traditional view of reducing cost although it makes some profit for the organization, it’s not accepted in the long run. Outsourcing will permit you to lead your business team for innovation which would be more successful as well as applicable for a long period and thereby you would be able to get a competitive advantage of having more profit.

Eli Stutz | April 9, 2014

I feel that in order for a BPO relationship to be successful, cost savings and innovation are necessary. Innovation alone without ROI is not going to create a lasting relationship or a successful project. We recently did a case study on our implementation with Ossur, improving their customer service process using BPM software: http://www.pnmsoft.com/resources/case-studies/ossur-case-study/
The fact that we reduced resolution time, and streamlined the feedback process was just as important as the innovation we introduced to integrate their existing customer service platform with BPM processes.